CAG State Finances Report and Fiscal Stress in States

Overview of the Report

CAG State Finances Report and Fiscal Stress in States: The Comptroller and Auditor General of India (CAG) released the State Finances 2023-24 report, presenting a consolidated assessment of the finances of all 28 Indian States for FY 2023-24.
This is the second edition of the report, following the first edition on State Finances 2022-23 released in September 2025.

The report acts as a macro-level diagnostic tool, highlighting fiscal trends, structural weaknesses, and risks in state-level public finance.

Static GK fact: The CAG of India derives its authority from Article 148 of the Indian Constitution and audits both Union and State finances.

Rising Public Debt Burden

The report flags a sharp increase in the Public Debt of States, which stood at ₹67.87 lakh crore as of March 31, 2024.
This amounts to nearly 23% of the combined GSDP, indicating sustained borrowing pressures.

High debt limits fiscal flexibility and increases interest obligations, particularly for states with weaker revenue bases.

Static GK Tip: GSDP is the state-level equivalent of GDP and measures the total economic output of a state.

Breach of Fiscal Deficit Norms

The Fiscal Deficit benchmark of 3% of GSDP, recommended by the 15th Finance Commission, was exceeded by 18 states in FY 2023-24.
This reflects challenges in aligning expenditure commitments with available revenues.

Persistent deviation from deficit targets raises concerns over long-term fiscal sustainability.

Extreme Fiscal Rigidity

The report highlights extreme fiscal rigidity across states.
Around 60% of revenue expenditure is absorbed by committed expenditures such as salaries, pensions, and interest payments.

This leaves very limited fiscal space for new developmental or welfare initiatives.

Static GK fact: Committed expenditure refers to non-discretionary spending that cannot be easily reduced in the short term.

Increasing Dependence on Union Transfers

States are becoming increasingly reliant on Union tax devolution for revenue support.
The share of tax devolution in state revenues rose from about 21% in 2014-15 to nearly 30% in 2023-24.

This dependency exposes state budgets to national economic cycles and central fiscal conditions.

Skewed Expenditure Pattern

The report observes a persistent dominance of revenue expenditure, accounting for nearly 83% of total spending.
In contrast, Capital Expenditure (Capex) remains low at around 16%, limiting long-term asset creation.

In states such as Punjab and Andhra Pradesh, borrowings are increasingly used to finance day-to-day expenses rather than productive investments.

Static GK Tip: Capital expenditure contributes to infrastructure creation and future economic growth, unlike revenue expenditure.

Transparency and Classification Issues

The CAG identifies transparency gaps arising from practices such as misclassification of expenditure, often referred to as shadow budgeting.
These practices obscure the true fiscal position of states and weaken accountability.

CAG Recommendation on Harmonisation

To address classification inconsistencies, the CAG has mandated harmonisation of Object Heads across the Union and States.
This reform is to be implemented by FY 2027-28, aiming to improve comparability, transparency, and fiscal oversight.

Static Usthadian Current Affairs Table

CAG State Finances Report and Fiscal Stress in States